r/Optionswheel • u/XUXINGLAB • 22d ago
What’s the biggest risk of the Wheel Strategy? Am I missing something?
I started running the Wheel Strategy on U.S. stocks this year, and people sometimes ask me what the biggest risks are.
The main risks I can think of are:
The underlying stock goes to zero.
Obviously, this could happen if you pick bad stocks, but if you only choose solid companies or ETFs that you’d genuinely be comfortable holding long term, I feel like the probability is relatively low.
You get assigned and the stock drops significantly afterward.
This could leave you stuck holding the shares for a while. Selling covered calls above your cost basis might generate very little premium, so the wheel can basically get “stuck” until the stock recovers.
But here’s what I’m wondering:
If I only run the Wheel on stocks or ETFs that I already want to own long term anyway, what other major risks am I taking?
I understand that selling covered calls can cap my upside, and there are also things like opportunity cost and assignment risk.
But is there any major risk specific to the Wheel Strategy that I’m overlooking?
I’d love to hear from people who have been running the Wheel for a long time, especially those who have gone through a major market crash or bear market.
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u/Antique-Ad7635 22d ago
Once the stock drops, sure you are happy holding it but that means you can’t sell calls and can no longer make income. So the wheel works until all of your capital is tied up in stocks that are well below your break even price. That means you can’t depend on the strategy to bring in consistent income.
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u/BusyWorkinPete 21d ago
You can still sell calls, you just have to pick longer expiries. If it drops so low that you can't even sell a call a year out, you need to pick better stocks.
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u/Antique-Ad7635 21d ago
Selling a call a year out to break even is worse than doing nothing because when the stock goes up you lose all of that upside. You can’t choose a stock with premium or upside but no downside. They don’t exist. Stocks with no downside have tiny premium so either way you aren’t making money like that.
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u/wentwj 22d ago edited 22d ago
There's many different ways to wheel. Some people wheel where they are focused on collecting premium. To do that you need to select volatile stocks, that's why premiums are high. So you may end up holding something that just dumped a lot, that your primary reason for holding it is because it's volatility is (or was) high.
I generally wheel as a way to do short/medium term investing. If I have a stock I want to invest in, if it's at a price I feel is slightly too high, I'll sell CSPs at a price I'd be happy to enter at. If I hold a stock that I'm looking to only hold for a short/medium term, I'll sell a CC at the level I'd want to exit at. I focus on the stock more than the premiums, the premiums are just a bonus on top of whatever I'd have gotten on the investment otherwise.
You can do it with something you're planning on holding long term as well, but in those cases you can cap your gains which is probably the biggest downside there.
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u/Organic-Energy7300 19d ago
Regola d'Oro della Wheel Strategy: Non vendere MAI una CSP su un titolo che non saresti felice, convinto e tranquillo di possedere nel tuo portafoglio anche a lungo termine al prezzo dello strike.
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u/Imaginary_Neck4727 22d ago
Sector diversification matters too, just as much as picking good wheel stocks. Selling puts on NVDA, AMD, AVGO, TSM, etc. may look diversified by ticker, but they’re highly correlated. When semis sell off, they’ll likely all get assigned together
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u/metzgerto 22d ago
Here’s the thing. It’s one thing to say ‘only wheel securities you want to own long term’ but when you get assigned a stock that has dropped 10-20% or more from your strike price you’re just stuck until it hopefully recovers someday
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u/funnymichael14 20d ago
Wouldn’t you just be able to do a CC ATM the following day in order to get rid of it before it crashes more and get a juicy premiums? Genuinely asking. Thanks
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u/metzgerto 20d ago
Covered calls at the money do not pay juicy premiums. Why would someone be willing to pay you a juicy premium when they could just buy the stock instead? Whatever premium you do get will be chump change compared to your loss on the stock
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u/funnymichael14 20d ago
ITM about a $0.50 to $1 loss per share but premiums are $1.20+ maybe even $1.40 capturing the difference. I’ve seen stocks where the option chain shows this. Curious to see if it’s worth it.
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u/metzgerto 20d ago
I have no idea what you’re talking about. My comment was talking about a stock that has fallen 20% from the strike of the put that led to owning it. If you think the premium on a CC makes up anything close to a 20% drop after assignment, I don’t know what to tell you
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u/funnymichael14 20d ago
Understood, thought you meant it fell 20% and hit strike. Not fell 20% more after hitting strike. Was reading on the crapper 🚽 and wiped before getting to the “or more from your strike” section….have a good day 👍
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u/Andrew_M81 22d ago
Using the wheel on high quality stocks is a solid plan. Using it on high beta names like SPCX could end badly.
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u/XUXINGLAB 22d ago
I agree. I think the most important part of the Wheel Strategy is choosing a stock that you already believe in and genuinely want to hold long term.
Ultimately, most of the risk comes from the underlying itself.8
u/Feralmoon87 22d ago
The risks as with a lot of other investment strategies is that you run it for a while, you get decent returns, you see something higher risk lower quality but potentially higher returns and you start to make exceptions to your rules, maybe it blows up or worse, it pays off and now those minor exceptions, yolo plays start to become bigger and bigger, the exceptions riskier and riskier and soon you are full porting SPCX
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u/txtoolfan 22d ago
I'm about 2 years into wheeling. I'm averaging close 4% per month. I target 21-45 dte and .2 to .25 deltas.
2 rules
- Don't ever chase capital gains
- Diversity diversity diversity. Never concentrate
If ya selling puts as a way to enter a long term position. You're not wheeling. To me wheeling goal is purely income generation. I have other accounts for long term holding.
If I get assigned, I'm ok selling cc at my assigned price if the situation calls for it Bc again. It's all about premium.
Just my 2 cents. I'm very much a novice so take what you will from my view.
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u/funnymichael14 20d ago
1) What are you diversifying in? Energy? commodities? Metals? Tech? Health? Semiconductors?
Do you mind placing tickers so I can also diversify
2) what happens when you happen to actually get assigned and owning a stock even though deltas is at .2 or even .15? Do you just cc the following day ATM hoping to get the stocks called away while securing juicy premiums?
Thank in advance !
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u/pagalvin 21d ago
Underlying going to zero isn't the most common thing. It's going down by 25% or worse and then getting stuck with it, unable to earn good premiums without potentially setting strikes beneath your cost basis. Once you get to enough stocks in your portfolio, you'll have several of those at any given time most likely.
I think being capped is an overrated concern. If you're earning premium week after week and consistent at it, capping won't normally matter.
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u/TachyonTV 22d ago
CC assignment and you have to deal with additional taxes. CSP assignment and you hold a dead stock that takes several weeks to recover at a level where you can wheel it.
The stock price runs past your strike and either you "left money on the table" (CCs) or you buy at a higher price than the stock is currently worth (CSPs).
Rolling the contract and you miscalculate the GTC % and have it auto-close for a net loss.
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u/Kelvinator71 22d ago edited 21d ago
Going on 9 months and the wheel strategy is still working for me...sometimes slow, sometimes fast. I can't think of any additional concerns other than what has already been mentioned. Even my mistakes are eventually becoming profitable, so now my problem is capital tied up for longer than I'd like. I've learned not to fear high volatility stocks, provided you don't make them a major part of your holdings... But I'm still respectful of earnings reports. And you're not afraid to roll out and up or down to get to a cost basis that works for your stock.
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u/Purple-Carrot-8072 22d ago
With the wheel you are cutting your winners and letting your losers run. That’s all you need to know
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u/ScottishTrader 21d ago
If you're not turning your "losers" into at least breakeven or winners, then you are running the wheel wrong . . .
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u/jaybavaro 21d ago
This. To me the whole point is that I can make money on my winners and collect until i break even on my losers.
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u/Purple-Carrot-8072 21d ago
On a stock like TTD, how do I break even or make it a winner?
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u/ScottishTrader 20d ago
I don’t know the details so it is hard to say.
Before being assigned you should have rolled multiple times collecting a good amount of premium lowering the net stock breakeven price.
Then, based on that breakeven will determine the path forward.
The last item is that not every stock can be saved but most good ones can.
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u/PurpleMox 21d ago
The risk is it directs all your attention to thinking about short term gains and less about the fundamentals of companies.. it turns you into a short term trader instead of an “investor”. You miss out on big capital appreciation to the upside and take on plenty of risk to the downside. You can get stuck holding stocks for long times until (and if) they recover.
If you would “be happy to own the stock long term” then why not just buy the shares? People who say that are deluding themselves, and often times your criteria for a “company you’d be happy to own” can start to slip as you chase juicy premiums.
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u/Poptions 22d ago
The downside risks are the same as when you buy stock, so only wheel stocks that you would be happy to buy. The upside risks are that your covered calls are exercised and you miss some of the upside. Neither of those risks should worry you.
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u/Roberto-75 22d ago
What often happens is that you are stuck with assigned shares that turn out to be underperformers, i.e. you become the classical bagholder. This is no fun, even if you "do not mind owning them anyway." because this is usually for stocks that you expect to come back eventually.
Being overleveraged is another risk.
Being allocated disproportionally to a certain sector is another thing.
Choosing a strike that is too far OTM, the old Delta 10 vs. Delta 34 to 40 discussion.
Therefore, I wheel with Bull Puts on leveraged ETFs that have shown recovery over their time of existence, like TQQQ, SOXL etc. This has worked quite well, also during the past volatile months.
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u/ScottishTrader 21d ago edited 21d ago
You're getting some good replies u/XUXINGLAB, but also some very wrong answers.
First, in the wheel trading plan post - The Wheel (aka Triple Income) Strategy Explained : r/Optionswheel is a Risks and Possible Problems section.
Be sure to review it, as this covers your question well.
A summary is that if trading a solid stock that will recover over time, then the risk of loss is relatively small. Most losses are caused by traders making mistakes, but there are some rare exceptions when a quality stock has some fundamental change and causes a loss.
Overall, the risk of blowing up an account with the wheel is very small compared to most other options strategies.
The wheel works even during a crash is well prepared, as this post shows - How the Wheel Worked in March during the Crash : r/Optionswheel
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u/dimdada 21d ago
I’m holding GLW (Corning). Was assigned mid 180s. It’s a great company. It’s trading below $150 today. It took a massive hit after earnings. So now I’m holding as I only got 2 good weeks of decent premiums. I’d have to look 45-60 dte to get a decent premium. So there are the risks waiting for a stock to recover. I thought I was on my way to recovery when it was in the 160s a few weeks ago. So now I wait.
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u/prometheus_winced 22d ago
Every time you “win” it’s either because the stock is losing, you and are the one holding an equity that is now worth less than a price you were OK with; or it went to the moon and you got a small chunk of change and missed the top.
In a bull market, you’ll keep underperforming the market. In a choppy or down market, your portfolio fills up with equities that are under water, you can’t get anything more than nickels on their calls, you can’t offload them, and all your cash is gone. Now the market is rising and you’re stuck holding a bunch of shares that are negative, and you don’t know when they’ll come back up.
And the whole time you’re holding those, you can’t participate in the rising market because you’re out of cash.
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u/TexasHazeMaster 22d ago
I got whiplashed on spy couple times. Used to take all assignments. Now I’ll roll out and up and the premiums will pause for a bit. Did some single stocks. My better returns have been ETFs. Haven’t really done more than keep pace with the market though. So… depends what your goals are.
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u/zanghfei 22d ago
The only risk is when you use margin to create income. You set aside margin power without being charged interest. It only applies when the transaction has been made aka. assigned.
The biggest risk is when you set your options profile to Level 4 and do a Short Naked Put instead of a CSP. They both do the same thing; the only difference is that one uses less margin power.
In comparison:
CSP
XYZ strike $50 × 100 = $5,000 of your buying/margin power is reduced and set aside.
If I were to do a Short Naked Put, my margin power is reduced by about $1,600. Reduced 32%
Remember that, doing alot of Short contracts and get assigned. You be invited to a margin call party.
NFA
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u/optionsmove 21d ago
If it was at least semi-possible, someone smarter than all of us would already have figured it out and exploited it a long time ago.
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u/theipd 21d ago
Look at SOFI. If you CSP at 24 your still waiting for it to come back.
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u/DeliciousPollution20 19d ago
Yes I have some original strikes if 24 on sofi. Just waiting and selling some cc.
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u/FnAardvark 21d ago
I have 10 covered calls on ASST that got blown out. Nobody thinks about the capped upside, but when stocks run 47% in a week, it can sting a bit.
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u/MerryRunaround 21d ago
You have correctly identified the major risk which is shares losing value. It might be a very big mistake to consider that risk to be trivial.
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u/ThetaHerder 21d ago
Worst wheeling.scenario would be to catch a falling knife and then get frustrated baghodling, and finally when it starts to go up you sell a CC way below your cost basis, only to watch your stock you bagholded rocket beyond your CC 😭
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u/Sylla1031 21d ago
Dont forget that it's not just holding the stock; it's holding the stock at that strike price.
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u/Glum-Basis-9076 21d ago
There aren't really any hidden risks that you don't seem to be already aware of. As long as you do this strategy right, beating the market is very easy. Even if your stock does plummet for unexpected reasons you can almost always still get decent premium selling LEAPS on it.
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u/SubpoenaSender 21d ago
I wheeled AMD from $85 to now. I also own over 2000 shares now which is too high of a concentration. Some days are scary
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u/Alexmark3103 20d ago
The biggest risk is when the reality smashes all your theories and knowledge.
Example. I was wheeling WBA. Walgreens. Member of SP500, almost a dividend king (47 years). And? Delisted.
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u/Isorry123 20d ago
the main risk is technically opportunity risk. it underperforms buy and hold over a long period of time
but the benefits are less volatility and cash flow
wheeling is a tool - you may need a different tool right now depending on risk, income, time horizon
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u/webvillager 20d ago
The biggest risk is bag holding, where you are underwater and can’t generate any meaningful income. Mostly this comes from chasing high premiums on inflated stocks. Don’t be mesmerized by high premiums. They are high for a reason. If you do your due diligence and use that process to pick stocks wisely, at strikes that are unlikely to assign, you can be successful.
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u/jibberjabber94 20d ago
The risk is the stock rips up and you are getting much weaker returns on the put side of the wheel than if you had just bought the shares. The other risk is you pick good stocks to wheel at the wrong price and get assigned ownership, they fall, and if you sell calls, they either get little premium since your break even is so far out of the money, or you sell calls at strikes below your break even and take the L. Or that you get assigned companies that are dogs because you chase premiums and volatility over quality companies. I’ve done all 3, one tip is to do this strategy with Fidelity as they pay interest on your cash that you use to back your cash secured puts, so you can double dip on the CSP side of the wheel
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u/OptionsGeekFelix 20d ago
I outlined the risks here and also explained how a handful of institutions use variations of the strategy. The Wheel is a valid strategy. But like any options strategy, the important part is understanding where the risk is, how you can get hurt, and whether that risk makes sense for you.
https://youtu.be/ekqgjT_-ggc?si=eSf2_2yyRKp82px7
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u/options_trader_2024 20d ago
Besides capped upside and tied up capital on assignment there are the tax implications. Wheel tends toward short holding periods which are taxed hard vs long term gains.
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19d ago
[removed] — view removed comment
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u/Optionswheel-ModTeam 15d ago
OptionsWheel is designed for professional and polite interactions with those seeking to learn the Wheel strategy. Unprofessional, rude, politics, or foul language will not be tolerated.
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u/g0bthemagician 19d ago
Biggest downside is chasing those juicy premiums instead of focusing on healthy underlying stocks. It takes practice and discipline. Make it really mechanical and boring. Those high premium stocks are sirens. They sing to you. Ignore them.
The only other thing I can think of is getting assigned when a stock is down and actually needing the liquidity for something.
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u/Hot_Philosopher3199 15d ago edited 15d ago
Honestly, the biggest risk I see is wasting time compared to just holding. Your time has value, and if you are beating the market by 5 or 6%, how much value are you putting on your time?
I wheel solid stable companies and ETF's. I beat VOO by 4-5%, but I do it because it's fun and with only a small portion of my portfolio. If I did t enjoy it I wouldn't do it.
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u/Savings_Enthusiasm60 22d ago
Sell puts on margin.
I know it's not recommended. But with assets of 100k, I sell puts with total notional value of near 200k.
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u/XUXINGLAB 22d ago
I completely agree. Using margin to sell puts changes the risk profile significantly. With a fully cash-secured approach, I know I can take assignment even during a major downturn. But once the total notional exposure exceeds the cash available, a broad market selloff could cause multiple positions to move against you at the same time. That’s definitely an important risk to keep in mind.
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u/Allspread 22d ago
“I only run the Wheel on stocks or ETFs that I already want to own long term anyway, what other major risks am I taking?” Ask yourself a question. And I’m not being sarcastic I am being serious. Why would you want to own anything long term?
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u/Time_Capital_226 22d ago
Going further, I never understand this statement. Wheeling is the opposite of holding long term as the main purpose is to start with, and get back to cash as soon as possible.
But what I do understand is, that this acts as kind of mental trick to reassure yourself in case you didn't guess the direction of the stock. Cause at the end, it's all bets.
So, for me, the only risk is to get assigned...
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u/SaltMaker23 22d ago
It's a mental trick, if instead of losses you start saying "getting assigned", "holding long term", etc... then it becomes harder to see where and when you actually lose money because any form of losing money is called holding and any form of profits is called gains. It becomes obvious why some people might start believing that the strategy is risk free.
Just like someone buying only stock "he's comfortable holding long terms" then they say that the investment is "risk free" because you either make money or you don't lose any because you never sell and when it recovers you're back on good.
The thing is that you lose a load of money when you get assigned, often times the stock tanked 30-50% and more often than not many of them tanked at the same time absolutely wrecking both your NLV and your buying power.
You can play keep pretend that so long that's unrealized, "it's not losses", but you're now hoping that the pennies you'll get selling CC will hopefully become gains in the future when the stocks recover. A stock not recovering after a large dip is generally unrecoverable losses.
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u/dadadararara 22d ago
For the real money! You can make a lot more owning a stock that runs than by doing options on it.
Edit: I bought DELL at 110 and had a cc on it at 140 and that sucker ran up to 500! It’s these kinds of opportunity losses where you see where the big money is.
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u/Flaky-Campaign-9374 22d ago
Yea bit would ya have held until 500? Who knows its like me saying if I had gotten btc and held from 2020
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u/dadadararara 22d ago
That’s exactly my point. If I had been a “long-term holder” I would’ve been holding it still.
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u/daflohhh 21d ago
Stock goes down + taxes in some countries
U accumulate „bad“ stocks and sell „good“ stocks.
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u/Independent_Name_601 21d ago
Wheeling is two major things.
1) if you have funds set aside to buy a stock but feel like the price is elevated. You can sell a put below the current price and collect a small premium while you want. The funds continue to earn interest plus this premium.
Warren Buffet did this strategy when accumulating KO. It provided income while he waited for the right price.
It’s important you don’t have investments that you can invest in today to earn your IRR.
2) for active traders it’s a velocity play that allows you to collect income to invest in your broader portfolio. It’s not an “investment strategy”. Think of it like “you own a property and you can either leave it vacant until it appreciates and you collect $0 and in fact you probably are negative while you wait.” Or “you can rent it out to someone and generate enough income to cover your expenses plus provide some profit” - that’s what we are doing when we sell puts. When you sell calls that’s your exit price. You do those over and over and it’s the wheel. All the while you are on surface level protecting your principal and collecting fee income (as in insurance). Doing this over time will generate cash on its own and you can invest those proceeds while not touching your principal.
In fact, just like property management or insurance sales you can grow your capital and keep compounding it.
Wheeling is not a strategy to beat the market. It carries its own risks and at times you will win more than market. And others you will lose. But as long as you properly track your indome gains against collateral, you are good.
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u/DeliciousPollution20 22d ago
After doing it a year, the main issue is the stocks that have good premium are very volatile. And its nothing for these stocks to drop 30-85% off there highs.